Rethinking of Values
(or thinking of value again)
Novel thinking of yours: CSCO as seen through the eyes of Sam Stockbroker, newly opened to this world after some forty years of cryogenic sleep. Yes, he would need to learn a few things.
Let us take it a step farther. Perhaps you would care to play the part of his tutor? I will play Sam. His first lesson: CSCO and "optimism vs potential".
One would think Sam's first thoughts would be that the stock price reflects boundless both. Immediately recognizing that the "switches" Cisco makes aren't the "switches" he understands, being a logical soul he would say "Orange juice or sprockets, it doesn't matter... look at the dollars", sharpen a #2 HB pencil and scribble down some figures. Rounded to reasonable precision.
7.5 B shares @ $20 each = 150 B$.
Net Margin (when they were profitable) 15%
Revenue required: 1000 B$ in 2001 constant dollars
Current revenue: 20 B$
Revenue required: 50 x current revenue
And Sam's eyes would bug out. Seeing this stock is priced as though 50 times its current annual revenues are in the bag. Very unusual (in his day).
Gasping at how much he obviously doesn't know, he tries to justify this to himself. More math. He doesn't know excel so you will have to bear with him. 30% growth rate, multiples are 1, 1.3, 1.7... carry the 1... 2.2... Adding these up for the next eleven years aah... the light begins to dawn. It works out to 53. Close enough to 50.
"Wait, please don't tell me, this can't be coincidence" he says... "Let's see. That makes sense if the stock is priced as though 30% growth for the next 10 and a bit years is in the bag. Zero risk. But that means 0% inflation, and 0% opportunity cost..." Unheard of... eyes bug out again...
What do revenues look like in 2011?? Sam's string of 30% increases YoY ends with 13.8 in year 10, so 13.8 x 20 = 266 B$ in 2001 constant dollars... oooh.. that's a lot of money. In 2011 dollars assuming 6% discount rate that's 494 B$...
But isn't the company barely shooting for only 100 B$ as a revenue rate in the next 10 years? Yes... they have their eyes set on the gleaming prize of one fifth of what is needed to sustain the economics of their stock price...
... which is about the right multiple of current price to traditional metrics of valuation too...
"AyCarumba! This can't be right. How could I be off by a full factor of 5? I can understand 2 in the unfinished aftermath of a bubble, but five? And I left out a lot of reasonable assumptions that would only make this worse. What am I missing"? he thinks, and turns to you with a pleading look in his eyes. "What is it about pricing stocks in this new economy that I don't understand?"
And you answer...? |
